The Solar Investment Tax Credit (ITC) Is Dropping Soon!
Mike "Tech Overlord" Collette
The solar Investment Tax Credit (ITC) is one of the most important federal policy mechanisms to support the growth of solar energy in the United States. Since the ITC was enacted in 2006, the U.S. solar industry has grown by more than 10,000% - creating hundreds of thousands of jobs and investing billions of dollars in the U.S. economy in the process.
Currently, the ITC is a 26 percent tax credit for solar systems on residential and commercial properties. However, this generous tax credit will be disappearing soon and you certainly don't want to miss out on all the savings!
What Homeowners Need to Know About the ITC Phasedown
There are two federal tax credits that incentivize solar investments: (1) the Section 48 Investment Tax Credit (ITC) available to businesses who invest in solar energy systems; and (2) the Section 25D residential solar energy credit that may only be claimed by individuals who purchase a solar energy system, typically installed on the roof of their home.
These two federal solar tax credits currently give similar benefits and both will drop from 26% to 22% on January 1st, 2021. Starting in 2022 the residential solar tax credit will cease to exist at 0%!
Here's what you need to know:
- To receive the full 26% residential solar tax credit, the system must be "placed in service" before the end of the day December 31, 2020. It is not enough to have signed a contract, or to have made a down payment or even to have begun construction. There is no bright-line test from the IRS on what constitutes "placed in service," but the IRS has equated this with completed installation in a Private Letter Ruling. The residential credit is claimed on the tax return for the year in which the qualifying expenditures are incurred, and the tax rules say the costs are incurred when the system installation has been completed. The 25D tax credit will step down to 22% in 2021, and 0% starting in 2022.
- If a homeowner buys a newly built home with solar and owns the system outright, the year that they move into the house sets their credit eligibility. Expenditures are generally treated as incurred when the original installation of the solar energy system is completed on an existing home. However, if a new solar energy system is purchased in connection with the new construction of a home, the costs are treated as incurred when the taxpayer begins living in the home.
- If a homeowner leases the solar system or purchases electricity from the system through a “power purchase agreement” (PPA), then the tax credit is claimed by the company that is leasing the system or offering the PPA. The homeowner is not eligible to claim the tax credit on their personal federal income tax returns at all. The homeowner does not own the system and the tax credit is handled entirely by the company providing the system. (The tax credit claimed by the system owner enables them to offer better lease or PPA terms.)
How Does the Solar Investment Tax Credit Work?
The Investment Tax Credit (ITC) is currently a 26 percent federal tax credit claimed against the tax liability of residential and commercial and utility investors in solar energy property. The residential ITC allows the homeowner to apply the credit to his/her personal income taxes. This credit is used when homeowners purchase solar systems and have them installed on their homes.
A tax credit is a dollar-for-dollar reduction in the income taxes that a person or company would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. Both the residential and commercial ITC are equal to 26 percent of the basis that is invested in eligible solar property which has begun construction through 2020. The ITC then steps down according to 22 percent for projects that begin construction in 2021 and finally after 2021, the residential credit drops to zero while the commercial credit drops to a permanent 10 percent.
How Can I Take Advantage of The Solar Investment Tax Credit?
Retail residential electricity rates (the amount you pay per kilowatt-hour, or ¢/kWh) have risen across the nation about 15% over the last 10 years. That is insane!
Electricity is a volatile market with many factors affecting the rate. The general consensus is that, like many recent years, electricity rates are getting higher for end users in 2020 and even higher in 2021.
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